What does ‘success’ mean in UK economic policy? A report on the panel discussion organised by the Bennett Institute for Public Policy.

The Bennett Institute for Public Policy launched in 2018, as a research body attached to the University of Cambridge. The institute seeks to combine current research in technology, natural sciences and engineering with politics and social research in order to engage in global public policy debates.

Chair: Professor Diane Coyle

Panellists:

Dr Patrick Diamond (Senior Lecturer in Public Policy at Queen Mary University London, former Head of Policy at 10 Downing Street for the Labour Government, 2001-2004)

Professor Helen Thompson (Professor of Political Economy at the University of Cambridge)

Vicky Pryce (former Joint Head of the UK Government Economic Service)

Dr Patrick Diamond on the role of the Treasury in economic policy success

The Treasury is the UK government department responsible for public finances and economic policy. The Civil Servants working in the Treasury, and other Departments for that matter, work under a Government Minister, in this case the Chancellor of the Exchequer. Thus, as a non-Partisan body, they should provide a degree of continuity, while the party in government is elected every four to five years.

Diamond argues that the Treasury is at the centre of political and economic action in government and as a result plays a key role in the success or failure of economic policy. However, he points out that their responsibilities have evolved in recent years. This is particularly due the Bank of England’s control over monetary policy, independent of government influence, and the more recent creation of the Office of Budget Responsibility in 2015 to produce independent economic forecasting and analysis of public finances.

Diamond breaks down the criteria of the Treasury for policy success into three areas:

Avoiding failures and blunders in order to minimise uncertainty and instability. He believes that this is driven by the institutional memory of previous humiliations, such as leaving the European Exchange Rate Mechanism in 1992, two years after the then Conservative Government, as an anti-inflation strategy had taken the UK into it.

Controlling how other Government departments spend their money. He notes that, in this area, the Treasury has become much more interventionist in the last decade and exercises considerable power over the activity of the many arms of the UK government.

Gaining the trust of the Chancellor. Each Chancellor has their own style of operating and ideological beliefs. Diamond states that a key aim of the Treasury is to convince the Chancellor that they are on his or her side and, by extension, to be in the room when the big decisions are made. The Treasury is non-partisan, but must still play the political game at this level.

Diamond offers a number of suggestions on how the Treasury could more effectively design and implement economic policy:

The desire of the Treasury to win the trust of the Chancellor can create a culture amongst Civil Servants of wishful thinking and undue optimism, in order to please the Chancellor. Diamond shows that this problem can go beyond the Chancellor to the Prime Minister. During the financial crash, there were widespread rumours that just 48 hours before the 2009 Budget, Brown was refusing to accept more negative economic forecasts from the Treasury, despite the recommendations of his Chancellor, Alistair Darling.

Avoiding ‘group-think’, that being an enclosed environment where core assumptions and practices aren’t challenged. Diamond believes that the Treasury should branch out and hire more employees with diverse cultural and research backgrounds; for example, by hiring more social scientists to complement a department dominated by economists.

Developing models to anticipate future risks. Diamond believes that policy makers are too quick to blame current problems on the 2008 financial crash, rather than analysing longer term structural trends. He points to the fact that that housing shortages and stagnating wage rates were exacerbated, rather than caused, by the 2008 crash.

Diamond finishes on a more general point about government policy in what has in recent years become an intensely divided UK political climate. He stresses that policy makers need to re-evaluate how they engage with the public. This is a crucial time where disaffection with the establishment and distrust of experts has become widespread, particularly due to the legacy of ‘Project Fear’ during the Scottish Referendum and the Brexit Referendum. For Diamond, citizen engagement and re-building trust must be a priority.

Thompson starts by identifying the failure to effectively regulate the banking sector in the years preceding the crash, leading to as profound a banking sector crisis as anywhere in the world. She identifies a number of changes in the UK banking sector that policy makers either did not recognise or did not respond to:

From the 1990s, UK banks began to operate more globally and moved heavily into investment banking, rather than traditional retail. Between 1990 and 2015, the balance sheet of UK banks cumulatively, as a proportion of UK GDP, increased from 70% to 450%.

To fund this expansion, UK banks undertook riskier short term borrowing practices. By 2007, the UK had the largest banking sector debt of any G9 country.

Thompson continues to critique the policies of the New Labour government, expressing her amazement that the performance of these policies remain contested and politically controversial:

New Labour largely ignored the new methods of funding that banks were using, as they were focused on making London more competitive as a global financial centre.

The Labour government borrowed excessively, but Thompson stresses that this was not necessarily an ideological inevitability. Rather, she points to a level of borrowing based on the continual overestimation of tax receipts from the Treasury, leading to an ever-increasing deficit. By 2007, the UK had the largest structural debt of any G7 country, proportional to its size

Thompson argues that the 2008 crash was a crucial part of the UK’s journey towards the Brexit vote in 2017. Ironically, she suggests that the UK’s more effective response to the crash, compared to the EU, which re-entered recession in 2011, started this chain of events. It led to more migrants choosing to come to Britain, creating a resentment that increased UKIP’s vote, leading David Cameron to announce a referendum to validate the membership of the UK in the EU.

Recommendations for the panel for more successful economic policy

Vicky Pryce: A mechanism for brining government departments together to co-ordinate policy more effectively. While Gordon Brown was much criticised during his tenure as Prime Minister for being a ‘control freak’, Pryce thinks this had its benefits, as it resulted in constructive oversight and evaluation from Number 10. Pryce believes that the laissez-faire approach of the Conservative- Lib Dem coalition, in government from 2010, towards government departments did not prove effective.

Dr Patrick Diamond: The creation of an independent body to evaluate the policy implementation of each government department, using their election manifesto as a frame of reference. This would increase the transparency of government operations and hold governments accountable to the electorate for their promises.

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